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CHAPTER 21

BASIS CONSOLIDATED
ACCOUNTS
1 WHAT ARE CONSOLIDATED
ACCOUNT?
 IAS 27 Consolidated Financial Statements and
Accounting for Investments is Subsidiaries requires a
parent company to prepare consolidated accounts
incorporating the results of the whole group.
 Consolidated accounts :the name given to the
accounting techniques which seek to reflect the true
position, as regards both profits and assets, when one
company controls another. They consist of:
---A consolidated balance sheet, in which all assets
and liabilities of group undertakings are aggregated,
and
---A consolidated income statement aggregating the
profits and losses of all group undertakings.
 For Paper 1.1 we are concerned only with the
consolidated balance sheet.
 Parent company A company which is controlled by a
parent company.
 Group of companies. Apparent company plus its
subsidiaries.
 Group of companies. A company plus its
subsidiaries.
 Minority interest. If the subsidiary is not wholly
owned by the parent, the ‘outside’ interest is referred
to as the ‘minority interest’
2 THE BASIC BALANCE SHEET
CONSOLIDATION PROCEDURE
 Preparing a consolidated balance sheet really
means' adding together’ the two balance
sheets. The investment in the subsidiary is
replaced by the underlying net assets of the
subsidiary.
 Example
P was incorporated on 1January 20X1.On
1January 20X3 it acquired 100% of the
ordinary shares in S which was incorporated
on the day. Five years later, on 31 December
20X7,the balance sheets of the two companies
were as follows:
 P S
 $ $
 Non-current assets 10000 5000
 Investment in S:5000$1 shares 5000
 Net current assets 5000 3000
 20000 8000
 Share capital :ordinary shares of
$1 each 10000 5000
Accumulated profits 10000 3000
20000 8000

Prepare a consolidated balance sheet at 31 December 20X7 for P


and its subsidiary
 Solution
In adding together the two balance sheets the $5000 investment is
S appearing in the P balance sheet is cancelled by the $5000 share
capital in the balance sheet of S
P and its subsidiary
Consolidated balance sheet as at 31December 20X7
 $
 Non- current assets 15000
 Net current assets 8000
 23000
 Share capital 10000
 Accumulated profits 13000
 23000

The $3000 increase in value of the assets since acquisition is
represented by the $3000 post-acquisition reserves of S, which
are combined with those of P in the consolidated balance sheet.
The share capital of the subsidiary company never appears as
part of the figure of the share capital in the consolidated balance
sheet.
 Goodwill on consolidation
---Goodwill :the difference between the cost of an entity and the
fair values of that entity’s net assets.
---If the parent pays more for the investment in the subsidiary
than the value of the subsidiary’s net assets, the difference
represents the amount paid for the unrecorded goodwill in the
subsidiary.
---Our approach is to calculate the net value of the
subsidiary's assets on the date it was acquired, which
of course is equal to its share capital and accumulated
reserves as on that date. We compare this with the
amount paid by the parent company, and the
difference represents goodwill.
Say P had $6000 for the shares.
 Balance sheets at 31 December 20X7
 P S
 $ $
 Tangible non-current assets 10000 5000
 Investment in S:5000 $1 shares 6000
 Net current assets 4000 3000
 20000 8000
 Share capital :ordinary shares of
 $1 each 10000 5000

 Accumulated profits 10000 3000


 20000
8000
Goodwill working
 $ $
 Cost of investment is S 6000

 Share of net assets acquired


 Share capital 5000
 Accumulated profits (at acquisition) nil
 5000
 P’s interest 100% 5000
 Goodwill on acquisition $1000
 Amortization of goodwill
---Goodwill must be amortized (depreciated) over its
estimated economic life, through the income
statement.
---If we assume a life of ten years for this goodwill, and
it was acquired five years ago(1 January 20X3) the
consolidated balance sheet at 31December 20X7 will
be as follows:
P and its subsidiary
Consolidated balance sheet as at 31 December 20X7
 $ $
 Non-current assets:
 Goodwill 1000
 Less: amortisation (5year) 500
 500
 Tangible non- assets 15000
 15500
 Net current assets 7000
 22500
 Share capital-ordinary shares of $1 each 10000

 Accumulated profits(10000+3000-500) 12500


 22500

---The amortization through the income statement at $100 per


year has reduced the accumulated profit balance)
 Minority interests
---As long as the parent owns more than 50%mthe
company is a subsidiary
---If the parent company owns ,say 80%of the ordinary
share capital, the holders of the remaining 20% are
referred to as the ‘minority', or ‘minority interest’.
---Total assets and liabilities are shown exactly as
before ,but a new item representing the /minority
interest’ must be introduced into the bottom half of the
consolidated balance sheet.
---The minority interest can be calculated by taking the
appropriate percentage of the net assets at the
balance sheet date, but net assets will again equal
share capital plus reserves and it is convenient to
calculate the minority interest by dividend up the share
capital reserves.
Say P had paid $4800 for 80% of the share capital of S
Balance sheets at 31 December 20X7

P S
$ $
Non-current assets 10000 5000
Investment in S:4000$ shares 4800
Net current assets 5200 3000
20000 8000
Share capital:ordinary shares of $1 each 10000 5000
Accumulated profits 10000 3000
20000 8000

Before calculating the minority interest, let us calculate


the goodwill in this example.
Goodwill working

Cost of investment is S $ $

Share of net assets acquired: 4800

Share capital 5000

Accumulated profits (as before) nil

5000

P’s interest 80% 4000

Goodwill on acquisition 800

The minority interest is calculated as at the current


balance sheet date and not as at acquisition
Minority interest working
$ $

Net assets of at the balance sheet date

Share capital 5000

Accumulated profits 3000

8000

Minority interest 20% 1600


P and its subsidiary
consolidated balance sheet as at 31 December 20X7
Non-current assets $ $
Goodwill at cost 800
Amortisation 400 400
Tangible non-current assets 15000
15400
Net current assets 8200
23600
Share capital-ordinary shares of $1 each 10000
Accumulated profits 12000
10000+(80%*3000)-400 22000
Minority interest 1600
 Pre-acquisition profit
---In the examples so far, the subsidiary was acquired
at its formation. It had no chance to trade and earn
profits before the acquisition
---If a subsidiary is acquired after its formation and has
accumulated some retained profit, only the post-
acquisition profit may be combined with the parent’s
accumulated profits. The pre-acquisition portion
represents assets at the date of acquisition, and so
must form part of the calculation of goodwill.
 Example
Q acquired 80% of the share capital of T on 1January
20X1 for $10000,when the accumulated profits of T
amounted to $4000.At 31 December 20X3,the
companies’ balance sheets were as follows:
Balance sheets at 31 December 20X3

Q T
$ $
Non-current assets 8000 11000
Investment in T at cost 10000
Net current assets 4000 3000
22000 14000
Ordinary share capital (shares of $1 each) 10000 5000
Accumulated profits 12000 9000
22000 14000

Goodwill is to be amortized on the straight line basis over


five years.
STEP 1 GOODWILL WORKING
$ $
Cost of investment in T 10000
Share if net assets acquired:
Share capital 5000
Accumulated profits 4000
9000
Q’s interest 80% 7200
Goodwill on acquisition 2800
Amortisation3*20%=60%*$2800 1680

Balance at 31December 20X3 1120


STEP 2 MINORITY INTEREST
WORKING
$ $
Net assets of T at the balance sheet date
Share capital 5000
Accumulated profits 9000
14000
Minority interest20% 2800
STEP 3 POST-ACQUISITION
PROFIT WORKING
$
Q: all 12000
T: 80%*(9000-4000) 4000
16000
Amortization of goodwill per working 1 (1680
)14320
Q and its subsidiary
consolidated balance sheet as a 31 December 20X3

$
Non- current assets(8000+11000) 19000
Goodwill (Working 1) 1120
Net current assets 7000
27120
Share capital 10000
Accumulated profits (Working 3) 14320
24320
Minority interest (Working 2) 2800

27120
 Companies are required to prepare consolidated
financial statements if they own more than 50% of
another company or control it in some other way.
 Subsidiaries may be excluded from consolidation in
some circumstance:
---Severe long –term restrictions on control
---Investment held for resale
 A group may be exempted from the requirement to
prepare consolidated financial statements if:
---Parent is w wholly-owned subsidiary of another
company
---Parent is a virtually wholly-owned subsidiary of
another company and minority have agreed that
consolidated financial statements are not required by
them.